Still think shale oil will make America oil independent? Still believe the clap trap voiced by most politicians and mainstream media cheerleaders about how shale oil will save us? Perhaps it’s time to reexamine the shale oil industry and the cash requirements of drilling well after well.

The main thing to understand about shale oil wells is that they deplete like crazy. After about two years of production most wells are about done. That means shale oil companies are faced with what’s known as the “Red Queen” problem. They have to drill more and more wells to keep production up.

Drilling all those wells is expensive. Wall Street has come to the rescue and raised boatloads of money from investors who bought into the hype and chased after high yield investments. It’s been another home run for Wall Street. Gullible investors were chasing after the dream of buying into low-grade debt (junk) without worrying about quality.

Now with oil at $50 a barrel and heading lower many shale oil companies have a problem. They cannot service the debt. Not only do the shale oil companies have a problem. Investors in high yield debt are going to get hosed. Wall Street has done it again. With oil above $100 a barrel The “hot market” of the day made for a good story. Now not so much. With financing cut off and the price of oil crashing shale oil companies are in deep trouble. WBH Energy will be the first of many filling for bankruptcy.

The First Shale Casualty: WBH Energy Files For Bankruptcy; Many More Coming

Submitted by Tyler Durden, Zero Hedge, on 01/07/2015

“There are too many ugly balance sheets,” warns one energy industry analyst, adding simply that “the group is not positioned for this downturn.” While the mainstream media continues to chant the happy-clappy side of lower oil prices, spewing various ‘statistics’ about how the down-side of low oil prices is ‘contained’ and the huge colossal massive tax cut means ‘everything is awesome’ for America, the data – and now actions – do not bear this out. Macro data has done nothing but disappoint and now, we have the first casualty of the shale oil leverage debacle as WSJ reports, on Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money. There are many more to come…

In December we illustrated the problem names (in the publicly traded markets) among the most-levered energy companies in America…

American oil and gas companies have gone heavily into debt during the energy boom, increasing their borrowings by 55% since 2010, to almost $200 billion.

Their need to service that debt helps explain why U.S. producers plan to continue pumping oil even as crude trades for less than $50 a barrel, down 55% since last June.

But signs of strain are building in the oil patch, where revenue growth hasn’t kept pace with borrowing. On Sunday, a private company that drills in Texas, WBH Energy LP, and its partners, filed for bankruptcy protection, saying a lender refused to advance more money and citing debt of between $10 million and $50 million. Neither the Austin-based company nor its lawyers responded to requests for comment.

Energy analysts warn defaults could be coming. “The group is not positioned for this downturn,” said Daniel Katzenberg, an analyst at Robert W. Baird & Co. “There are too many ugly balance sheets.”

In 2010, U.S. companies focused on producing oil and gas had $128 billion in combined total debt, according to financial data collected by S&P Capital IQ.

As of their latest quarter, such companies had $199 billion of combined total debt.

Before crude prices began falling, U.S. oil and gas producers were able to acquire leases and drill wells even if that meant outspending their incomes. Debt was used to bridge the cash shortfall so that companies could develop oil fields in Texas, North Dakota and newer locations including Colorado.
Now that is coming back to bite.

The upshot of cash conservation and higher borrowing costs will be less money spent on producing oil and natural gas. Concho Resources Inc. said late Monday that it was cutting its capital spending budget by a third, to $2 billion.

Will 2015 bring even more protest and chaos? Will citizens around the world finally realize there will be consequences to the actions of their politicians and they won’t be pretty?

Young Protester in Turkey

The first of the year always brings efforts to look ahead, to predict the future. Forecasters pretend they can look ahead accurately and governments and politicians pretend they can control events. We live in a world of lies and accept them as truth. The average citizen has no good way to filter the constant flow of information and to separate lies and spin from fact.

Governments have always lied to their citizens. With the Internet and TV, and the 24 hour news cycle, lying and spin have reached a whole new level. No one except a few well placed elite really knows what is truth and what is fiction. The stories the elite wish to present are largely reported by brought and paid for media outlets or don’t rock the boat reporters.

However, the technology works both ways. Due to advances in technology, citizens, especially younger ones, have begun to receive news outside of traditional news channels and to organize into groups protesting the actions of governments and politicians. With the rise of social media, like Facebook and Twitter, the elite is losing control. Many citizens no longer trust their governments.

Who can blame young citizens for being dissatisfied? The debt burden run up by those now in power is being passed to the younger generation as prospects for a stable well paid employment decrease. Young citizens of many western nations face a future that will be harsher than the lives enjoyed by their parents.

Where will this trend lead? I don’t presume to know. I do expect the year 2015 to be filled with large-scale protests and chaos. Large numbers of dissatisfied youth around the world, communicating and organizing by using social media, pretty much guarantees a volatile 2015.

Are you optimistic or pessimistic about the nature of world events in 2015? The Bloomberg News Service has given both optimists and pessimists plenty to think about in its guide to possible world hotspots in 2015.

World Crisis

Are we about to enter one of histories black holes? The common view, at least for Americans, is that any difficulties will be of short duration and living standards will continue to gradually improve. Overall, things will just get better and better.

However, this view flies in the face of history, which measures human progress as a series of two steps forward and one or more steps back. Consider the dark ages in Europe which lasted for hundreds of years. Or consider the present war in Syria, which has reduced towns which survived for thousands of years to rubble and destroyed the comfortable lives of millions of Syrians.

Human strife has often made the world an unstable place. The year 2015 may bring instability to a fever pitch.

The Long Crisis appears to be entering a critical stage.

A Pessimist’s Guide to the World in 2015

By Bloomberg News

Skirmishes in the South China Sea lead to full-scale naval confrontation. Israel bombs Iran, setting off an escalation of violence across the Middle East. Nigeria crumbles as oil prices fall and radicals gain strength. Bloomberg News asked foreign policy analysts, military experts, economists and investors to identify the possible worst-case scenarios, based on current global conflicts, that concern them most heading into 2015.

The following charts indicate a long-term reversal of the dollar has reached the take off point. Breaking the downtrend line on long-term charts probably signals a many year advance for the dollar. While such a move is not certain (what is in an uncertain world?) there is a high probability.

DXY Long Term

Janet Yellen and the Fed are in a box of their own making. Having kept interest rates artificially low for years Yellen is signaling increases will begin in 2015. This will support a uptrend in the dollar and ring a bell for the stock market. It will be a bell ringing signaling doom.

A strong dollar will crush emerging market currencies and stocks. The carnage is underway. Look for a currency crisis early in 2015.

Commodity prices are largely priced in dollars. Look for falling prices as the dollar gains strength.

However, the big event will be in the unwinding of carry trades. There are probably nine TRILLION dollars of trades that will be affected. There will be chaos and a world of hurt as these trades unravel.

Better get ready. Put on your crash helmet. 2015 will be a most interesting year.

Dollar Resumes Climb as Yellen Signals 2015 Interest-Rate Rise

By Andrea Wong Dec 20, 2014 12:00 AM ET

A gauge of the dollar rose for the eighth time in nine weeks after Federal Reserve Chair Janet Yellen signaled that the central bank is poised to increase interest rates next year starting as early as April.

DXY Breaking Trend Line

The greenback headed for gains this year against all except one of its 31 major peers, a feat it hasn’t accomplished since 1997, as Yellen said the impact of Russian turmoil on the U.S. economy is small. Hungary’s Forint and the Polish Zloty sank on concern the economic crisis that has driven the ruble down 44 percent this year will spread. The Swiss franc weakened the most in two months versus the euro after the central bank introduced negative interest rates.

Yellen is “really trying to say there’s a lot of volatility out there, but it’s not having a dramatic impact on the outlook of U.S.,” Kevin Hebner, a foreign-exchange strategist at JPMorgan Chase & Co., said by phone yesterday in New York. The process of the market adjusting to the Fed’s rate-rise projections “is going to get the dollar appreciating, especially against the euro and yen.”

Bloomberg’s gauge of the dollar rose 0.9 percent this week in New York to 1,125.58, the highest close since March 2009. That followed a 0.6 percent fall last week that snapped a seven-week rally. It has gained 10 percent this year.

The greenback rose 0.6 percent to 119.50 yen, also an eighth gain in nine weeks. It advanced 1.9 percent to $1.2229 per euro and reached $1.2220, the strongest since August 2012. The 18-nation currency fell 1.2 percent to 146.15 yen, a second week of declines.

Weekly Roundup

The forint slumped 4.2 percent versus the dollar, the biggest loser among the 31 major currencies, and the zloty fell 3.7 percent. The ruble extended its plummet as President Vladimir Putin said yesterday the crisis in Russia may last for two years.

The weakening of the zloty was welcomed as a support for exporters, central-bank policy maker Elzbieta Chojna-Duch was quoted as saying by the PAP newswire. “If the depreciation persists, it may be seen as a substitute for a rate cut,” she said.

Colombia’s peso led gains, surging 4.8 percent, on a stabilization in the price of crude oil, the Andean nation’s biggest exports. The pesos of Chili and Mexico were the next among advancers, adding 1.2 percent and 1.1 percent.

‘Telltale Sign’

Switzerland’s franc tumbled after the Swiss National Bank’s decision to protect the currency’s 1.20 per euro cap boosted speculation the European Central Bank will expand stimulus measures next year.

Switzerland’s move was a “telltale sign that the SNB is cautious because of the ECB,” said David Song, a New York-based currency analyst at FXCM Inc. “The SNB is going to follow along with the ECB in terms of the easing cycle.”

The franc depreciated 0.2 percent to 1.20359 per euro, the biggest decline since the five-day period ended Oct. 3.

The yen extended losses after the Bank of Japan said in a statement Dec. 19 in Tokyo it will boost its monetary base at an annual pace of 80 trillion yen, a decision forecast by all 33 economists surveyed by Bloomberg News. The economy is expected to continue a moderate recovery as the effects of an April sales-tax increase dissipate, the BOJ said.

Unstoppable Dollar

The dollar has gained against all of its 31 major counterparts this year except the Hong Kong dollar, a currency pegged to the greenback and which is up 0.01 percent. It last managed this feat in 1997, when another currency tied to the greenback at that time, China’s yuan, managed a 0.23 percent gain.

The U.S. currency recovered its losses this month after Fed officials on Dec. 17 dropped a pledge to keep borrowing costs near zero for a “considerable time.” The shift in guidance means “the committee considers it unlikely to begin the normalization process for at least the next couple of meetings.”

The Federal Open Market Committee’s next scheduled decisions are Jan. 28, March 18 and April 29.

The FOMC statement made no reference to the Russian currency crisis or other global risks that have roiled financial markets. Yellen said afterward that officials discussed the issue at this week’s policy meeting and agreed it would have little impact on the U.S.

The common perception is that the collapse in oil prices is a good thing. For some people this thought is correct. But for the world as a whole the collapse in oil prices makes an already unstable world even more unstable. There are winners and losers.

Overall the collapse of a major asset class is dangerous. We all like the lower prices for gas at the pump, but may not like at all many of the adjustments in financial matters lower prices will bring.

The Oil Collapse: How Seasoned Traders Are Responding

Jared Dillian, Editor, The 10th Man

I was in Memphis last week visiting some folks. I found myself in a conference room with some very seasoned commodity traders… veterans of the floor, some going back to the ‘70s. Let me tell you something: if you ever find yourself talking to a 40-year veteran of the commodities markets, you should listen to what he has to say. Anyone who can last that long trading futures is pretty smart.

Collapse in WTI Oil

Funny thing is, I’ve been around long enough that now I am one of the old traders!

But I’m not a commodities guy by training. I’m one of those slicked-back-hair moneychanger guys who is never going to get to heaven. But I always learn a lot when I go to Memphis—which, by the way, is the third-biggest futures trading city after Chicago and New York. There are quite a few large trading firms that specialize in grains, meats, and cotton. Memphis is a big deal, and probably the best-kept secret in the financial world.

So I asked about what it was like to trade live cattle during the BSE (mad cow) outbreak about 10 years ago. “How about limit down for an entire week?” they said. Small traders went under. Cattle ranchers went under, guys who lifted their hedges at exactly the wrong time. It was downright ugly.

That was bad.

But what’s happening to oil is a million times worse.

There are a lot of folks who get pretty angry when you suggest that a near-50% drop in the price of oil might be a negative in the short term. They look at you like you’re dumb. They talk about the massive benefit to consumers, the synthetic “tax cut” that everyone’s getting, what it’s going to do to consumption, etc.

All of this is true. But if you take a major commodity and slice it in half in the span of a month or two, there are going to be major consequences.

When I say that the commodities markets haven’t seen anything like this since 1980 when gold went haywire, I mean it. And you don’t put gold in your gas tank. Sure, there have been some minor calamities, like when cotton went parabolic a few years ago, but crude oil is perhaps the world’s most important commodity when you take into account both its economic and geopolitical significance. People go to war over the stuff. Routinely. And with oil falling from $105 to $57 in just six months, it might happen again.

We’ll get to that in a second. But for perspective, when people look at this move in oil 10 years from now, they’re going to call it the “Crash of ‘14.” That’s my prediction. A move of this magnitude in a short amount of time is a crash. When stocks went down 19% in a week in 2008, that was also a crash.

What’s the definition of a crash? I say any move over six standard deviations. For comparison, the Crash of ‘87 was 25 standard deviations—a move so uncommon, so statistically rare, that it wasn’t supposed to happen in a length of time greater than the age of the universe.

I haven’t done the math on oil yet, but if it’s not six standard deviations, it’s close.

* * * *

As you probably know by now, the move in oil has been more of a supply story than a demand story. We were drilling holes all over the planet in search of it. My wife works in the Turkana Basin, on the border of northwest Kenya and Ethiopia, which is one of the most remote spots in the world. They were drilling for it there, too.

That’s what happens when oil gets to $140 a barrel. People are incentivized to look for it. It takes time to explore and produce the stuff. It takes years for wells to finally come online and for supply to hit the market.

There are still projects that may never be completed, like Vaca Muerta in Argentina, that Yacimientos Petrolíferos Fiscales (YPF) is developing in conjunction with Chevron. The poor Argentinians—screwed again.

And like we’ve been seeing in the mining industry, once a company has brought production online, it’s difficult to take it offline. It’s hard to start it back up again, to get all the permits, to hire everyone back. So people will continue to produce at uneconomic levels for a long time, hoping that the price will come back, while simultaneously ensuring that it won’t for a long time.

So back to my earlier point—is it bullish or bearish for the US? It’s not a hard question to answer. People are making it hard. 20 years ago, it would have been unequivocally bullish. Now, maybe not. We produce slightly more oil than we consume. There will be winners and losers, which is being reflected in the stock market.

For some countries, it’s unequivocally bearish, especially for adversaries like Venezuela, Iran, and Russia. But also for allies, like Canada, which is probably in the most precarious economic position of any country in the world.

The collapse of Russia’s economic system is dangerous. In an interconnected world, there are sure to be unintended consequences. The unfolding disaster brings to mind the 1998 currency crisis. It brought a lot of pain to investors worldwide.

With Putin’s and Russia’s troubles there’re dangers to the world other than economic. Putin blames the West for ganging up on Russia and imposing sanctions. Putin feels Russia has been treated badly over the Ukraine situation as the US supported coup led to the downfall of the Russian leaning duly elected President. The Ukraine was an integral part of Russia for hundreds of years. Western media, led by President Obama, have made statements Putin must feel are inaccurate and are personal attacks.

Vladimir Putin, Russian President

The West, especially the US and NATO members, should be more careful in its treatment of Putin. Cooperation is much safer than confrontation. Putin is not the type of man that forgives or forgets.
He blames the US and Saudi Arabia for collusion in the collapse of oil prices.

Expect Putin to find a way to even the score.

The Collapse of Putin’s Economic System

By Henry Meyer and Ilya Arkhipov Dec 16, 2014.

The foundations on which Vladimir Putin built his 15 years in charge of Russia are giving way.

The meltdown of the ruble, which has plunged 18 percent against the dollar in the last two days alone, is endangering the mantra of stability around which Putin has based his rule. While his approval rating is near an all-time high on the back of his stance over Ukraine, the currency crisis risks eroding it and undermining his authority, Moscow-based analysts said.

The president took over from an ailing Boris Yeltsin in 1999 with pledges to banish the chaos that characterized his nation’s post-communist transition, including the government’s 1998 devaluation and default. While he oversaw economic growth and wage increases in all but one of his years as leader, the collapse in oil prices coupled with U.S. and European sanctions present him with the biggest challenge of his presidency.

Related:

Russian Stocks Drop 12 Percent
Here’s Why the Russian Ruble Is Collapsing
“People thought: ‘he’s a strong leader who brought order and helped improve our living standards,” said Dmitry Oreshkin, an independent political analyst in Moscow. “And now it’s the same Putin, he’s still got all the power, but everything is collapsing.”

In a surprise move today, the Russian central bank raised interest rates by the most in 16 years, taking its benchmark to 17 percent. That failed to halt the rout in the ruble, which has plummeted to about 70 rubles a dollar from 34 as oil prices dived by almost half to below $60 a barrel. Russia relies on the energy industry for as much as a quarter of economic output, Moody’s Investors Service said in a Dec. 9 report.

New Era

The ruble meltdown and accompanying economic slump marks the collapse of Putin’s oil-fueled economic system of the past 15 years, said an executive at Gazprombank, the lender affiliated to Russia’s state gas exporter. He asked not to be identified because of the sensitivity of the issue.

While the spread of the Ebola virus has dropped off the front pages of American media the disease still rages in Sierra Leone. The following story shows how difficult Ebola is to control in remote rural areas.

Ebola virus biopharmaceutical drug research in biochemical lab

The video below honors Ebola fighters that were named Time magazine’s Person of Year.

Horror in Sierra Leone: A Single Spark Gives Ebola New Life

BY MAGGIE FOX, NBC News

An especially deadly outbreak of Ebola burned unseen in a remote part of Sierra Leone for several weeks, giving public health experts a reality check. It’s also a perfect embodiment of the warning that they’ve been giving for months: that a single spark can set off a conflagration of disease and death.

It happened in Kono, a remote district bordering Guinea. World Health Organization workers heard rumors of deaths and traveled there to find scenes out of a horror movie. At least 87 people had died and been hastily buried, often without the precautions needed to stop the corpses from infecting the living.

“When we got there the staff at the hospital were exhausted,” said Winnie Romeril, a spokeswoman from WHO. “They had been working nonstop, trying to manage the large numbers of patients who came in.”

Romeril, who was with one of the WHO teams in Kono, said the sick and dying were flooding the small facility.

“Everybody was at wit’s endThere weren’t enough vehicles to safely transport the sick, and local residents were so far from any cities or towns that they had not gotten word about Ebola. They didn’t know to seek treatment right away, they didn’t know they should stay away from other people, and they didn’t even know that a fever might mean something far worse than malaria.

“In this case, because people were so remote, by the time they got to the hospital it was five days out. They were dehydrated. It was too late,” Romeril said. Death rates, she said, were 85 percent.

WHO, the Sierra Leonean government and non-profit groups had been focused on the other hot spots and especially the cities. “It’s easy to get distracted when it gets into an urban area,” Romeril said. They were just feeling defeated,” she told NBC News.

“It would have been better if we had seen it earlier.”

Sierra Leone has overtaken Liberia as the country where the Ebola epidemic is the worst, with hundreds of new cases reported every week.

It’s still bad — WHO reports more than 18,000 cases and more than 6,500 deaths in Sierra Leone, Liberia and Guinea. Experts now say it’ll be the middle of next year in the best-case scenario for getting the epidemic under control.

Bubbles do not end well. Wall Street sucked investors into the high yield junk bond market with the expectation oil prices would continue to rise. With oil prices plunging these investors now face huge losses. With oil at $60 a barrel many oil companies, especially oil fracking companies, will not be able to service the debt.

Kind of like the false premise home prices would never fall. Investors seem to never learn. Wall Street make money fast brokers tell a good story. Too bad most don’t end well.

Fed Bubble Bursts in $550 Billion of Energy Debt: Credit Markets

By Christine Idzelis and Craig Torres Dec 11, 2014

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.

Oil Rigs at night.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania — it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

The Fed’s decision to keep benchmark interest rates at record lows for six years has encouraged investors to funnel cash into speculative-grade securities to generate returns, raising concern that risks were being overlooked. A report from Moody’s Investors Service this week found that investor protections in corporate debt are at an all-time low, while average yields on junk bonds were recently lower than what investment-grade companies were paying before the credit crisis.

Borrowing costs for energy companies have skyrocketed in the past six months as West Texas Intermediate crude, the U.S. benchmark, has dropped 44 percent to $60.46 a barrel since reaching this year’s peak of $107.26 in June.

Yields Surge

Yields on junk-rated energy bonds climbed to a more-than-five-year high of 9.5 percent this week from 5.7 percent in June, according to Bank of America Merrill Lynch index data. At least three energy-related borrowers, including C&J Energy Services Inc. (CJES), postponed financings this month as sentiment soured.

“It’s been super cheap” for energy companies to obtain financing over the past five years, said Brian Gibbons, a senior analyst for oil and gas at CreditSights in New York. Now, companies with ratings of B or below are “virtually shut out of the market” and will have to “rely on a combination of asset sales” and their credit lines, he said.

Companies rated Ba1 and lower by Moody’s and BB+ and below by Standard & Poor’s are considered speculative grade.

Stimulus Effect

The Fed’s three rounds of bond buying were a gift to small companies in the capital-intensive energy that needed cheap borrowing costs to thrive, according to Chris Lafakis, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Quantitative easing “has been one of the keys to the fast, breakneck pace of the growth in U.S. oil production which requires abundant capital,” Lafakis said.

One of those to take advantage was Energy XXI Ltd. (EXXI), an oil and gas explorer, which has raised more than $2 billion in the bond market in the past four years.

The Houston-based company’s $750 million of 9.25 percent notes, issued in December 2010, have tumbled to 64 cents on the dollar from 106.3 cents in September, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yield 27.7 percent.

Energy XXI got its lenders in August to waive a potential violation of its credit agreement because its debt had risen relative to its earnings, according to a regulatory filing. In September, lenders agreed to increase the amount of leverage allowed.

Bubble Risk

The debt rout is one of the latest examples of a boom and bust in U.S. markets as unprecedented Fed stimulus fuels a hunt for yield. The fallout has been limited so far, yet the longer the Fed holds its benchmark lending rate near zero, the greater the risk of more consequential bubbles, according to former Fed governor Jeremy Stein.

“To the extent that highly accommodative monetary policy courts risks to the economy further down the road, there is more of a live trade-off than there was at 8 percent unemployment” said Stein, now a Harvard University professor.

Joblessness of 5.8 percent in November was about half a percentage point away from the Fed’s estimate of full employment, or the lowest level of labor market slack the economy can sustain before companies bid up wages.

Job Creation

Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.

“There are distortions in multiple markets,” said Lawrence Goodman, president of the Center for Financial Stability, a monetary research group in New York. “It is like a Whac-A-Mole game: You don’t know where it is going to pop up next.”

Fed Chair Janet Yellen said in a July 2 speech in Washington that she saw “pockets of increased risk-taking,” including in the corporate debt markets.

Midstates Petroleum Co. (MPO) is spending about $1.15 drilling for every dollar earned selling oil and gas. Outspending cash flow is the norm for many companies in the U.S. shale boom.

The Houston-based company’s $700 million of 9.25 percent notes due in June 2021 have plummeted to 53.5 cents from 108 cents at the beginning of September, according to Trace. The debt is rated Caa1 by Moody’s and B- by S&P.